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Contact Information:
Edward S. Kisscorni, CPA
290 Suncrest Court, SW
Grandville, MI 49418

Office: 616/233-0667
Cell: 616/443-6730
Fax: 616/233-0667

Blog: www.EdKisscorni.com/Blog1
Email: Ed@EdKisscorni.com
 



 



 

 Blog 
Friday, November 15 2013

Agricultural Property May Be Excluded From Sales Study

Public Act 162 of 2013, effective November 12, 2013, provides that an assessor and equalization director are required, in finalizing sales studies for property classified as agricultural real property for local Michigan property tax assessment purposes, to determine whether an affidavit had been filed attesting that transferred property will remain qualified agricultural property.  If an affidavit had not been filed, the property must be reviewed to determine whether classification as agricultural real property was correct or should be changed.  The assessor for the local tax collecting unit where the property was located must contact the property owner to determine why the owner did not file an affidavit.  Unless there are convincing facts to the contrary, the sale of property classified as agricultural real property for which an affidavit had not been filed may not be included in a sales study.

Principal Residence Exemption Extended to Permanently and Totally Disabled Veterans

Public Act 161 of 2013, effective November 12, 2013, extends the principal residence property tax exemption to apply to the principal residence of veterans who have been permanently and totally disabled as determined by the U.S. Department of Veterans Affairs as the result of military service and are entitled to veterans benefits at the 100% rate.  The exemption also applies to veterans who have been rated by the U.S. Department of Veterans Affairs as individually unemployable.  The exemption continues to remain available to the unremarried surviving spouse of a disabled veteran whether the veteran died before or after the original exemption was granted.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Thursday, November 14 2013

Exemption Amount to be Phased-In Over Twenty-Six Years

Public Act 159 of 2013 and Public Act 160 of 2013, both essentially the same and both effective November 6, 2013 enact a trade-in allowance deduction on the purchase of a motor vehicle or recreational vehicle.   The agreed-upon value of a motor vehicle or recreational vehicle used as part payment of the purchase price of a new or used motor vehicle or a new or used recreational vehicle is excluded from the tax base for purposes of Michigan Sales Tax.

The agreed-upon value of the trade-in vehicle must be separately stated on the invoice or other similar document given to the purchaser.

The deduction is phased in as follows:

Beginning December 15, 2013, the maximum trade-in value is limited to $2,000.

Beginning January 1, 2015, and each January thereafter, the allowable trade-in value increases by $500 unless Section 105D of the Social Welfare Act is repealed.

Beginning January 1 of the year in which the trade-in value exceeds $14,000, there will no longer be a limit on the agreed-upon value of the trade-in vehicle.

In addition, beginning November 15, 2013, credit for the agreed-upon value of a titled watercraft used as part payment of the purchase price of a new or used watercraft is excluded from the tax base so long as the agreed-upon value is separately stated on the invoice or bill of sale.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Wednesday, November 13 2013

Changes Made to Exemption Provided to Owners of Industrial or Commercial Personal Property

Public Act 153 of 2013, effective November 5, 2013, enacts various cleanup amendments to Michigan personal property tax exemption provisions which have previously been enacted. The changes generally apply to the process regarding the exemption provided to owners of industrial or commercial personal property.

An exemption is allowed for personal and industrial personal property owned by a taxpayer in a particular local tax collecting unit if the true cash value of the property is less than $80,000.  The affidavit for claiming the exemption must be filed by February 10 in each tax year. The affidavit must be in the form developed by the State Tax Commission.

"Commercial personal property" and "industrial personal property" refer to property classified as such under Sec. 211.34c, M.C.L., or would be classified as commercial personal property or industrial personal property under Sec. 211.34c were it not for the exemptions provided for qualified new property, qualified previously existing personal property, and eligible personal property.

The property subject to the exemption must be owned by, leased to, or in the possession of the owner or related entity on December 31 of the immediately preceding year.  A "related entity" is a person that directly or indirectly controls, is controlled by, or is under common control with the person claiming the exemption. The terms "control," "controlled by," or "under common control" mean the possession of the power to direct or cause the direction of the management and policies of a related entity directly or indirectly.  There is a rebuttable presumption that control exists if any person directly or indirectly owns, controls, or holds the power to vote directly or by proxy 10% or more of the ownership interest of any other person or has contributed more than 10% of the capital of the other person.  Indirect ownership includes ownership through attribution or through intermediary entities.

If the local assessor believes that the property for which the exemption is claimed is not eligible for the exemption, the assessor may deny the claim for exemption by notifying the taxpayer of the reasons for the denial and advising the taxpayer of the right to appeal the denial to the local board of review.  The local assessor may deny the claim for exemption for the current tax year and any of the three immediately preceding years and require the tax roll to be amended and revised tax notices be sent out reflecting the denial of the exemption.

Personal Property Statement 

The local assessor or supervisor is required to notify personal property owners of the requirement to file a personal property statement.  This notice must include information on the exemptions available for qualified new property, qualified previously existing personal property, and eligible personal property.  The notice must be sent by January 10 of each year. The statement remitted by taxpayers for 2015 must include a schedule of when any personal property listed in the statement will be eligible for exemption as qualified new personal property.

Fraudulent Claim for Exemption

A person who fraudulently claims an exemption for personal property is guilty of a misdemeanor punishable by imprisonment of 30 days to six months and/or a fine of $500 to $2,500.  An assessor must report suspected fraudulent claims to the prosecuting attorney.

Books and Records

A person who files a claim for an exemption of eligible personal property must maintain adequate books and records relating to the description, the date of purchase, lease, or acquisition, the purchase price, lease amount, or value of all industrial or commercial personal property for a period of four years.  The records must be made available to the local assessor, county equalization department, and the Department of Treasury for four years after the exemption is claimed.

A person who files a claim for an exemption of qualified new personal property or qualified previously existing personal property must maintain adequate books and records regarding the description, date of purchase, lease, or acquisition, the purchase price, lease amount, value, customary industrial use, and asset classification grouping, until the property is no longer eligible for exemptions.  The records must be made available to the local assessor, county equalization department, and the Department of Treasury in any year in which the person claims an exemption.

The local assessor is required to retain all affidavits claiming the exemption for personal property for at least four years after completion of the assessment roll.

Board of Review

For eligible personal property exemptions, the local board of review may hear appeals for the current tax year and immediately preceding three tax years.  For qualified new personal property or qualified previously existing property, the board may only hear appeals for the current year.

If the board denies a claim for exemption, the taxpayer may appeal the decision to the Michigan Tax Tribunal. If the board approves the exemption, it must notify the appropriate officials of the affected local governments.

Changes Made to Exemptions for Eligible Manufacturing Personal Property

Public Act 154 of 2013, effective November 5, 2013, enacts changes to the Michigan personal property tax exemption for eligible manufacturing personal property that is qualified new personal property and the exemption for qualified previously existing personal property.

"New personal property" refers to property that was initially placed in service in the state or outside of the state after December 31, 2012.

The legislation removes the requirement that the affidavit for claiming a qualified new personal property exemption or a qualified previously existing personal property exemption be filed with the Department of Treasury.  A person must file an affidavit with the local tax collecting unit by February 10 of the first year in which the person is claiming the exemption.  An affidavit claiming a qualified new personal property exemption applies to all existing qualified new personal property at the time the affidavit was filed as well as any subsequently acquired qualified new personal property.

If the local assessor believes that the property for which the exemptions are claimed is not eligible for the exemptions, the assessor may deny the claim for exemption by notifying the taxpayer of the reasons for the denial and advising the taxpayer of the right to appeal the denial to the local board of review.  The local assessor may deny the claim for exemption for the current tax year only and require the tax roll to be amended and revised tax notices to be sent out reflecting the denial of the exemption.

Taxpayers claiming the exemption for qualified new personal property are required to maintain books and records.  A person fraudulently claiming the qualified new personal property exemption or the qualified previously existing personal property exemption is subject to penalties.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Tuesday, November 12 2013

Legislation Would Transfer the Court of Claims to the Michigan Court of Appeals

Senate Bill 652 was originally introduced in the Michigan Senate on October 24, 2013 by Senator Rick Jones and assigned to the Senate Judiciary Committee.  Since then, it has been on a fast track passing in the Senate 26 to 11 and passing in the House 57 to 52.  It was enrolled on November 7th and presented to the Governor on November 8th.  After approval by the Governor, Senate Bill 652 which would be given immediate effect, would transfer the Court of Claims from the 30th Judicial Circuit, Ingham County Circuit Court, to the Michigan Court of Appeals.  

The following, from the Senate Fiscal Analysis, describes this major shifting of responsibility which also includes tax appeals from the Department of Treasury.  Senate Bill 652 is separate and not in any way related to the Department of Treasury proposal to eliminate the Tax Tribunal and Court of Claims for tax appeals which I reported on my Tuesday, November 5th Blog.  See link below:

 http://www.edkisscorni.com/blog/view/785/department_of_treasury_proposes_changes_in_the_tax_appeals_process

The Court of Claims is the court with the jurisdiction over claims and demands against the State of Michigan and any of its departments, commissions, boards, institutions, arms, or agencies.  It also has jurisdiction over any counterclaim on the part of the state against any claimant who brings an action in the Court of Claims.

Currently, under Chapter 64 the Revised Judicature Act, [MCL 600.308 et al.] the Court of Claims is created as a function of the Circuit Court for the 30th Judicial Circuit, Ingham County.  A judge of that circuit, and any judge the State Court Administrator assigns into that circuit, may exercise the jurisdiction of the Court of Claims.

Under Senate Bill 652 , the Court of Claims would consist of four appeals court judges from at least two Court of Appeals districts assigned by the Michigan Supreme Court.  An appeals court judge, while sitting as a judge of the Court of Claims, could exercise the jurisdiction of the Court of Claims.  A judge assigned as a judge of the Court of Claims would be assigned for a term of two years and could be reassigned.  The term would expire on May 1 of each odd-numbered year.

When a judge who was sitting as a judge of the Court of Claims left office or was otherwise unable to serve as a judge of the Court of Claims, the Supreme Court could assign a Court of Appeals judge to serve for the remainder of the judge's term on the Court of Claims. The Supreme Court would have to select a chief judge of the Court of Claims from among the Court of Appeals judges assigned to it.

All matters pending in the Court of Claims as of the bill's effective date would be transferred to the clerk of the Court of Appeals, acting as the clerk of the Court of Claims, for assignment to a Court of Appeals judge sitting as a Court of Claims judge.

The Supreme Court would have power to make special rules for the Court of Claims.

Senate Bill 652 also would do the following:

  • Allow Court of Claims sessions to be held in the various Court of Appeals districts, and allow a plaintiff to file a cause of action in the Court of Claims in any Court of Appeals district.  The court's clerk would assign a cause of action filed in the court by blind draw to a Court of Appeals judge sitting as a Court of  Claims judge.
  • Require the Court of Claims to sit in the Court of Appeals district where the judge serving as Court of Claims judge otherwise sits, unless otherwise determined by the chief judge.
  • Require, as now, the court to hold at least four sessions each year.
  • Require all fees in the Court of Claims to be at the rate established by statute or court rule for actions in the circuit court, not the appeals court, and to be paid to the Court of Claims clerk.
  • Delete a provision that requires the state to reimburse Ingham County for costs incurred in operating the Court of Claims.
  • Grant the Court of Appeals original jurisdiction over challenges to the transfer of the Court of Claims from the 30th Circuit to the Court of Appeals.

The bill would rewrite the section describing the jurisdiction of the court.  Under the bill, except as otherwise provided, the Court of Claims would have the jurisdiction to do the following:

  • Hear and determine any claim or demand or any demand, statutory or constitutional . . . or any demand for monetary, equitable, or declaratory relief or any demand for an extraordinary writ against the state or "any of its departments or officers," notwithstanding another law that confers jurisdiction of the case in the circuit court.
  • Hear and determine any counterclaim on the part of the state, or any of its departments or officers, against any claimant who brought an action in the Court of Claims.
  • Appoint and use a special master as considered necessary.
  • Hear and determine any action challenging the validity of a notice of the transfer of pending and future Court of Claims matters from the 30th Circuit Court to the Court of Appeals.

The bill would define "the state or any of its departments or officers" to mean this state or any state governing, legislative, or judicial body, department, commission, board, institution, arm, or agency of the state, or officers, employees, or volunteers of any of those entities, acting, or who reasonably believes that they are acting, within the scope of their authority while engaged in or discharging a government function in the course of their duties.

Under the Revised Judicature Act, the State Administrative Board is vested with discretionary authority, upon the advice of the Attorney General, to hear, consider, determine, and allow any claim against the state in an amount less than $1,000.

The bill also contains statements that Chapter 64:

(1) does not deprive the circuit court of exclusive jurisdiction over appeals from the district court and administrative agencies as authorized by law and (2) does not deprive the circuit court of exclusive jurisdiction to issue, hear, and determine prerogative and remedial writs under Article VI, Section 13, of the State Constitution.

Finally, and I repeat, Senate Bill 652 is separate and not in any way related to the Department of Treasury proposal to eliminate the Tax Tribunal and Court of Claims for tax appeals.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Monday, November 11 2013

Proposed Legislation Designed to Capture Michigan Tax on Internet Sales

Senate Bill 658 (Sales Tax) and Senate Bill 659 (Use Tax) have been introduced in the Michigan Senate.  They would, if enacted, add affiliate and click-through nexus provisions to the sales and use tax acts.

Affiliate Nexus

The legislation would provide that a seller is presumed to be engaged in business in Michigan if any other person, other than a common carrier, that has substantial nexus with Michigan does any of the following:

  • sells a similar line of products as the seller under the same or a similar business name;
  • maintains an office, distribution facility, warehouse, storage place, or similar place of business in Michigan to facilitate the delivery of tangible personal property sold by the seller to customers in the state;
  • uses trademarks, service marks, or trade names in the state that are the same or substantially similar to those used by the seller;
  • delivers, installs, assembles, or performs maintenance or repair services for the seller’s customers in Michigan;
  • facilitates the seller’s delivery of property to customers by allowing the seller’s customers in the state to pick up tangible personal property sold by the seller at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in the state; or
  • conducts any other activities in the state that are significantly associated with the seller’s ability to establish and maintain a market in the state.

A seller would also be presumed to be engaged in the business of making retail sales in Michigan if any "affiliated person" has substantial nexus with the state.

The presumption may be rebutted by demonstrating that activities of the other person or affiliated person were not significantly associated with the seller’s ability to establish or maintain a market in Michigan.

Click-Through Nexus

The legislation would also provide that a seller is presumed to be engaged in business in Michigan if the seller enters into an agreement with one or more other persons under which the person, for a commission or other consideration, directly or indirectly, refers potential customers, by a link on an Internet website, in-person oral presentation, or otherwise, to the seller. The presumption requires that the cumulative gross receipts from sales by the seller to customers in this state who are referred to the seller be greater than $10,000 during the immediately preceding 12 months.

The presumption may be rebutted by demonstrating that the persons with whom the seller had agreements did not engage in activities that were significantly associated with the seller’s ability to establish or maintain a market in Michigan.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Friday, November 08 2013

Audits to Be Conducted In Accordance with Generally Accepted Auditing Standards (GAAS)

Sampling Allowed Only If Taxpayer Does Not Have Substantially Complete Records

 

Public Act 148 of 2013, effective October 29, 2013, effectively modifies and limits audit procedures used in uniform unclaimed property examinations.  The legislation modifies the auditing standards and processes for Michigan uniform unclaimed property examinations to do the following:

  • require any examination of a person's records by the state treasurer or his or her agents to be performed in accordance with generally accepted auditing standards to the extent applicable to unclaimed property examinations;
  • require a person who has been audited or whose records have been examined to be given a complete copy of the audit report;
  • specify in detail the work performed, the property types reviewed, any estimation techniques employed, calculations showing the potential amount of property due, a statement of findings and all other correspondence;
  • allow the state treasurer or agents to determine the amount of any abandoned or unclaimed property due and owing based on a reasonable method of estimation consistent with the auditing standards, if the person being examined does not have substantially complete records; and
  • require the state treasurer, within six months after the effective date of the legislation, to file a request for rule-making with the Office of Regulatory Reinvention to initiate rules on auditing standards.

"Substantially complete records" means at least 90% of the records necessary for unclaimed property examination purposes as defined under the principles of internal controls. Substantially complete records are not meant to be an absolute measurement of all available records.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Thursday, November 07 2013

Transfer from a Development Corporation to a LLC Not Commonly Controlled

In Detroit Lions, Inc. v. City of Dearborn, Michigan Court of Appeals, Nos. 299414 and 300830, October 22, 2013, the sale and transfer from a development corporation to a limited liability company (LLC) of a practice facility consisting of land, a two-story office building, a practice building with an indoor football field, an outdoor football field, a par-three golf hole, and certain other outbuildings gave rise to uncapping the property’s taxable value for local Michigan property tax purposes because the corporation and the LLC were not commonly controlled. It did not matter that the practice facility’s taxable value had already been uncapped when a professional football team initially entered into a long-term lease with the development corporation. The applicable statutory provision did not limit the number of times that a parcel’s taxable value may be uncapped.

Furthermore, the Michigan Tax Tribunal did not misapply the law or adopt a wrong principle when it determined that the practice facility’s highest and best use was its existing use. The professional football team’s use of the property as an integrated professional football team headquarters and practice facility was the most profitable use to which the property could feasibly be put. The Tax Tribunal also correctly relied on the practice facility’s original build-to-suit cost, less depreciation, to determine the property’ true cash value for the tax years at issue.

With regard to the valuation of personal property, the tribunal committed an error of law because it relied exclusively on the city’s proposed values and did not conduct an independent determination of the true cash value of the personal property.  The Tax Tribunal was not entitled to merely adopt the values advanced by the city, which were derived from the State Tax Commission’s multiplier tables, without conducting its own analysis.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Wednesday, November 06 2013

Audits to Be Conducted In Accordance with Generally Accepted Auditing Standards (GAAS)

Sampling Allowed Only If Taxpayer Does Not Have Substantially Complete Records

 

Public Act 148 of 2013, effective October 29, 2013, effectively modifies and limits audit procedures used in uniform unclaimed property examinations.  The legislation modifies the auditing standards and processes for Michigan uniform unclaimed property examinations to do the following:

  • require any examination of a person's records by the state treasurer or his or her agents to be performed in accordance with generally accepted auditing standards to the extent applicable to unclaimed property examinations;
  • require a person who has been audited or whose records have been examined to be given a complete copy of the audit report;
  • specify in detail the work performed, the property types reviewed, any estimation techniques employed, calculations showing the potential amount of property due, a statement of findings and all other correspondence;
  • allow the state treasurer or agents to determine the amount of any abandoned or unclaimed property due and owing based on a reasonable method of estimation consistent with the auditing standards, if the person being examined does not have substantially complete records; and
  • require the state treasurer, within six months after the effective date of the legislation, to file a request for rule-making with the Office of Regulatory Reinvention to initiate rules on auditing standards.

 

"Substantially complete records" means at least 90% of the records necessary for unclaimed property examination purposes as defined under the principles of internal controls. Substantially complete records are not meant to be an absolute measurement of all available records.

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Wednesday, November 06 2013

Request for Principal Residence Exemption May Result in Refund of Tax

Public Act 140 of 2013, effective October 22, 2013, requires a process be established by which property owners may file a request with the Michigan Department of Treasury for a property tax principal residence exemption (PRE) for property owned and occupied by the owner in any year before the three immediately preceding tax years if the PRE was not on the tax roll due to a qualified error on the part of the local tax collecting unit, and the property owner owned and occupied the property within the applicable dates by which an affidavit for a PRE must be filed. A "qualified error" means the same as that term is defined in §211.53b, M.C.L.

If the department approved the request and the exemption then results in an overpayment of tax by the property owner, the department must notify the treasurer of the local tax collecting unit, the county treasurer, and other affected officials.  Local records must be corrected to account for the granting of the exemption consistent with procedures established by the department.

Any overpayment by the property owner, including any interest paid, must be rebated within 30 days of receiving notice from the department granting the exemption. The rebate would be without interest.  The treasurer in possession of the tax roll may deduct the rebate from the appropriate tax collecting unit's subsequent distribution of taxes and must bill to the appropriate tax collecting unit the unit's share of taxes rebated.  A local tax collecting unit that is responsible for a qualified error must reimburse each county treasurer and other affected local official required to correct official records for the costs incurred.

If the property owner received a PRE in any year before the three immediately preceding years, but was not entitled to the PRE due to a qualified error on the part of the local tax collecting unit, the department may deny the principal residence exemption.  If the department denied the PRE, the property owner must be issued a corrected or supplemental tax bill with interest accruing 60 days after the date the corrected or supplemental tax bill was issued. Also in this case, the local tax collecting unit that is responsible for the qualified error must reimburse the county treasurer and other affected local officials for the costs incurred.

Posted by: Ed Kisscorni AT 08:41 am   |  Permalink   |  Email
Tuesday, November 05 2013

Proposed Michigan Tax Court to Replace Tax Tribunal and Court of Claims

Upon request from the Treasurer, the Department of Treasury has prepared and released a proposal to streamline the tax appeal process.  Currently, appeals from the Department of Treasury can be filed in either the Tax Tribunal within 35 days or the Court of Claims within 90 days.  The proposal recommends the elimination of the Tax Tribunal and the Court of Claims for tax appeals and replaces it with a new Michigan Tax Court.

The Michigan Tax Court proposal has been presented to the governor's office, the legislature and the state bar for review.  Senator Bruce Caswell, Chair of the Senate Judiciary Committee has organized a working group to study the proposal and to take it to legislation.

The proposed Michigan Tax Court would be part of the judicial branch of government under the direct control of the Michigan Supreme Court with judges appointed by the Supreme Court.      

 

Posted by: Ed Kisscorni AT 02:34 pm   |  Permalink   |  Email
Monday, November 04 2013

Ruling Will Impact the Direction of Tax Administration in Michigan

TMW SBT appeal denied. 

Fradco and SMK oral arguments, Wednesday, October 9, 2013. 

Andrie oral arguments Wednesday, November 6, 2013. 

NACG Leasing oral arguments, Thursday, November 7, 2013.

Ford Motor Company granted leave to appeal the Michigan Court of Appeals decision which found that when a taxpayer checked the "disagrees with determination" box on the audit determination letter for an audit under the former single business tax (SBT), it did not constitute a "claim for refund" under state law.  Because it was not a claim for refund, the lower court improperly allowed interest to begin accruing 45 days later.

International Business Machines Corp. the Michigan Supreme Court issued an order granting the application for leave to appeal the Court of Appeals judgment holding that a taxpayer was required to use the Michigan Business Tax (MBT) apportionment formula (100% sales) and could not elect to use the Multistate Tax Compact’s apportionment formula (equally-weighted property, payroll, and sales).

Winget the Michigan Supreme Court vacated the judgment of the Michigan Court of Appeals which held that taxpayers were not permitted to combine business income from separate entities for personal income tax purposes.

Malpass and Wheeler the Supreme Court ruled that (1) the personal income tax law did not prohibit individual taxpayers from combining profits and losses from unitary flow-through businesses and then apportioning that income on the basis of the businesses’ combined apportionment factors and (2) for the years at issue, combined reporting could include foreign entities to the extent that the foreign entity and the individual taxpayers in the state were a unitary business.  The Department of Treasury will follow the Michigan Supreme Court decisions in Malpass, Wheeler and Winget which would allow the option or choice to file a unitary or combined return for Michigan Individual Income Tax.

 

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email
Friday, November 01 2013

Amended Individual Income Tax Returns and Refund Opportunities Exist

On June 24, 2013 in a unanimous decision by Michigan’s Supreme Court, an individual who is an owner of multiple flow-thru entities, as reported for Federal Income Tax Purposes (e.g. S-corporation, Partnership), may consider and if applicable combine the profits and losses from unitary flow-through businesses and then apportion that income on the basis of those businesses' combined apportionment factors.

The apportionment of the unitary combined income is not limited to entities formed within the U.S. boarders (waters-edge), the apportionment can be properly applied to a foreign entity, if the foreign entity and individual’s in-state business are unitary.

The application of the unitary business principal is not based on a change to Michigan’s income tax act, it based on clarification by the Michigan Supreme Court, and as a result unitary is applicable to any tax year open under statute.  Michigan has a four year statute of limitations, generally speaking, starts the later of the due date of the tax return, (e.g. April 15, 20xx) or the date the tax return is filed.

The unitary business principle provides that a state may tax multistate business conducted by determining if the following factors exist:

  1. Economic Realities (Integrated With, Dependent Upon or Contribute To)
  2. Flow of Value (Functional Integration, Economies of Scale, Common Management)
  3. Substantial Mutual Interdependence

Per the Michigan Supreme Court, individual taxpayers in Michigan where unitary applies, may use either a separate-entity reporting method to apportion income, or a combined reporting method.

Separate-entity reporting requires each entity with a nexus to Michigan to be considered as a separate and distinct entity, regardless of whether it could comprise a unitary business with other entities (i.e. separate Michigan Forms 1040-H representing the distributive share of income or loss for each flow-thru entity with multi-state activity).

Combined reporting requires each member of a unitary business to compute its individual taxable income attributable to activities in the state by taking a portion of the combined net income of the group through the utilization of combined apportionment factors (i.e. Single Michigan Form 1040-H, combining the share of distributive share of income or loss of each member of the unitary group as well as combined Michigan Sales over Total Sales).

What You Should Do:

What every taxpayer should do who receives income from multiple flow-thru entities is complete a nexus, apportionment and unitary study in order to determine if the distributive share of business income or loss from flow-thru entities may be apportioned.  Once the nexus study is complete and it is determined what states nexus exists, determine Michigan Sales over Totals sales for in order to determine the tax base in Michigan.  Last, complete a unitary analysis and if applicable determine which method, Separate-Entity or Unitary Combined reporting will yield the lowest tax. 

The Michigan Supreme Court has ruled either separate or unitary combined entity reporting may be used, unitary is not mandatory.  In addition, if unitary combined reporting is the method yielding the lowest tax in a year, it need not be the same method followed in either the preceding or subsequent year.

Examples When Unitary Combined Filing May Yield A Lower Tax in Michigan:

  1. Include in the unitary combined tax base losses from activities outside the State of Michigan not included using the Separate-Entity Method.
  2. Include in the unitary combined tax based losses from foreign activities not included using the Separate-Entity Method.
  3. Include in the unitary combined apportionment factor sales outside the State of Michigan not included using the Separate-Entity Method.
  4. Include in the unitary combined apportionment factor sales from foreign entities not included using the Separate-Entity method.

The author of this article is Ronald Kaley, please contact him at ron@ronkaley.com or at 616-350-5304 with your questions.

 

 

Posted by: Ed Kisscorni AT 01:00 pm   |  Permalink   |  Email

 

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